Foreclosure refers to a legal procedure where a lender pushes for the sale of assets used as collateral for a loan, such as a house. This is done on account of failure by the borrower to make payments on the loan. In this case, the lender believes that this is the best way to recover the loan balance. They, therefore, actively seek to repossess the mortgaged property.
Different parts of the world have different laws that govern foreclosures. Some are cross-cutting while others are specific to a region. Always check out the laws governing foreclosures in your locality.
Foreclosure can be a daunting process for anyone to go through both emotionally and financially. Luckily, this process can be avoided. Be sure to manage your spending, keep tabs on all your outstanding loan repayments, read and understand all clauses in your lender-borrower agreement and read up on the laws affecting foreclosures in your region. This is a critical step in understanding how to stop foreclosure, as some regulations and procedures are area-specific.
Below are the four types of foreclosure:
Type #1: Pre-foreclosure
Anyone who has experienced a financial crunch at some point in time can tell you for free that it is extremely essential to have a stable alternative source of income. This type of foreclosure is what gets you through the tough times. It is particularly important when you are servicing a loan.
If you happen to fall behind in your loan payments for up to 3-6 months and above, you are in violation of the agreement entered with your lender. The lender can then issue a legal notice notifying you as the borrower that they have already begun the legal process of foreclosure.
Most lenders opt for the less tedious and inexpensive solution of restructuring the loan to make debt payment easier. If you are a homeowner seeking to get out of debt, you can also go for a short sale or acquire a deed in lieu of foreclosure. A short sale is when you sell your home or property for the outstanding amount of money payable to the lender while a deed in lieu of foreclosure is when a borrower willingly surrenders their property to the lender in exchange for debt relief.
Type #2: Strict Foreclosure
At the start of the foreclosure process, a lender files a notice of default, which brings to the borrower’s attention the act of defaulting on the loan. If in a position to do so, the borrower can then pay off the remaining debt within the stipulated timeframe and save their property.
Failure to do so will result in the progression of the foreclosure process. When dialogue fails, strict foreclosure is the next option. This is where the lender acquires approval from a court to immediately repossess the property following the failure of the borrower to pay back the debt by the set deadline. Check if there are any requirements in your area which lenders have to meet before embarking on strict foreclosure.
Type #3: Non-Judicial Foreclosure
In some instances, lenders may choose to forego a court’s approval altogether and instead independently effect their right to foreclose on a property. This notwithstanding, non-judicial foreclosure can only be conducted in the constraints of the power of sale clause as featured in the deed of trust and the country’s foreclosure laws.
The deed of trust is a document agreed upon by the lender, the grantor or owner of the property, and the Public Trustee who holds the power of sale. A non-judicial foreclosure, therefore, necessitates the involvement of the Public Trustee’s office.
Homeowners should be extra cautious when engaging in this type of foreclosure as it has a very limited timeframe in which one can make arrangements to keep their home.
Type #4: Judicial Foreclosure
Contrary to the non-judicial foreclosure process, the judicial foreclosure process largely involves the courts. The lender initiates the process by filing a civil lawsuit against the defaulter and serves them with a formal court summons and foreclosure complaints. The court then selects a referee and tasks them with the responsibility of conducting the foreclosure auction.
Once this is done, the lender visits the county clerk’s office where the property is situated and records an official public notice stating that the property is attached to a pending lawsuit. At this point, it’s all systems go for the foreclosure auction as the court now issues a Notice of Foreclosure Sale (NFS) detailing the date, time and place of the auction.
To keep the borrower in the loop, the NFS is published and sometimes posted for a specified time before the auction. This gives the borrower a chance to raise the legal objections they may have or stop the auction if they can repay what they owe before the actual moment of sale. Judicial foreclosure is an extensive process, which may take up to eight months to complete.